The investment landscape has changed dramatically over the past few decades – environmental, social and governance concerns, ranging from a depleting ozone layer and unethical supply chains to corruption concerns and gender discrimination, have ushered in a new form of investing: sustainable and ethical investing. The practice of sustainable and ethical investing aims to produce sustainable outcomes while providing the same (or hopefully higher) returns as traditional investments. There are numerous benefits to this strategy.
Firstly, sustainable and ethical investing has the intrinsic aim to improve the world. Adopting ESG investment models at a client’s request will therefore help push the needle towards a cleaner, more equitable world. The use of an ESG investment model also has the benefit of modernising an investment practice – the investing landscape has evolved to consider ESG as a mainstay, making it vital that investment and wealth managers employ a tool that allows them to factor in ESG preferences and, as a result, stay up to date.
Sustainable and ethical investing may also provide a monetary benefit – a Morningstar analysis discovered that “surviving sustainable funds (those that existed 10 years ago and still exist today) outperformed their surviving traditional funds over a 10 year period”. Similarly, research by the Morgan Stanley Institute for Sustainable Investing found that “sustainable equity funds outperformed their traditional peer funds by a median total return of 4.3 percentage points”. While no investment is risk-free, sustainable and ethical investing does appear to provide a more than a financial benefit to those engaged in the practice, which may increase the client’s satisfaction.
Another benefit of sustainable and ethical investing is that it allows those involved in the investment decision making process to comply with current sustainability regulations and those that are likely to come. Regulators are increasingly seeing the importance of sustainability, with MiFiD II, the FCA’s new sustainable fund labels and more launched in a bid to promote transparency within the financial industry and to protect consumers. Investment managers who discuss sustainable and ethical investing into their clients are therefore not only adhering to the rules in place today, but are also setting themselves up for a smoother transition into the rules that will inevitably come in the future as the world moves towards a more sustainable outlook.
Sustainability is here to stay, and the investment industry can welcome the practice by observing the host of benefits it provides. The world is slowly taking steps towards becoming cleaner and greener, and the financial industry holds a pivotal key to unlocking this bright future.
ETHiX can enrich ESG discussions with clients, by providing an independent assessment, analysis and reporting of client portfolios and ESG models. ETHiX helps customer-facing staff to enhance their use of ESG data with ESG portfolio monitoring and optimisation. Contact us today to find out more.